Variable rate investor home loans

If you’re in the market to buy a house or an apartment as an investment property, and plan to rent it out to tenants in order to earn an income, you may be wondering how to finance the purchase. A variable rate investor home loan is one option, but what is it, and how does it work?

In general terms, there are three types of home loans that are available to Aussie property investors – fixed rate investor home loans, where the interest rate you pay will remain stable; variable rate investor home loans, where the interest rate is flexible and can go up and down; and split investor home loans, which are a combination of the other two.

For property investors, there can be advantages to a variable rate home loan, but there are certain potential pitfalls, and important things to be aware of before applying.

What is a variable rate investor home loan?

A variable rate home loan investor home loan is a loan you take out for the purpose of purchasing an investment property. The interest rate that your lender charges you is flexible, and not set in place. This means that the amount of interest you pay on the loan could increase or decrease month to month, depending on market forces and the decisions of your lender. Investor home loans tend to have higher interest rates and a lower loan-to-value ratio (LVR) than those for owner occupiers, because lenders can consider them to be riskier.

Who decides when a variable interest rate goes up and down?

Your bank or lender will have the final say as to whether the interest you pay on a variable rate investor loan goes up or down, but whatever call they make is likely to be guided somewhat by the decisions of the Reserve Bank of Australia (RBA).

The RBA board meets each month except January and sets the official interest rate, known as the cash rate. Lenders are not required to set their rates according to this, but most will put rates up or down in line with what the RBA does.

It is worth noting that RBA decisions are not the only factor in how lenders set interest rates, and market forces also play a part. A variable rate can go up or down at the discretion of your lender, even if the RBA cash rate has held steady this month.

What features does a variable rate investor home loan have?

Variable rate investor home loans typically come with a number of features that their fixed rate counterparts do not. These can include offset accounts and redraw facilities, the ability to make extra repayments if desired, and extras packages that include features such as credit cards and transaction accounts.

An offset account

An offset account is effectively an everyday bank account that is linked to your home loan. The money you deposit into your offset account will go towards paying off the balance of your home loan, and will also reduce the interest payable, but you will still have access to it if required. Typically, you will have a debit card linked to your offset account, so you can use it for everyday transactions, as well as paying bills and the like.

A redraw facility

Much like an offset account, a redraw facility allows you to access the funds from additional repayments you have made on your home loan. A key difference is that it does not function like a bank account, meaning that there will not be a debit card attached, and the funds will not be as readily available for everyday transactions. While your funds will still be accessible, you may find you are less tempted to spend  with an offset account.

The ability to make extra repayments

With a variable rate investor home loan, you will typically have the ability to make additional repayments above and beyond your regular monthly repayments. You can usually deposit as much money as you like into your home loan account without penalty, and this money can both bring down the balance of your home loan and help you save on interest by lowering the principal of the loan. Making additional repayments may also help you pay your home loan off faster.

Packaged extras

Some variable investor home loans can come with packaged extras, and depending on your lender, these can include credit cards and everyday banking accounts. If you would be using these products anyway, packaging them up with a home loan could potentially allow you to save on fees. Some lenders may also offer a discount on your variable rate if you sign up for a package.

What are the possible advantages of a variable rate investor home loan?

Potential upsides of a variable rate investor home loan include added features, potential for your interest rate to go down, and being able to make additional repayments on your loan. In more detail, these advantages include:

• Features: Depending on your provider and what they offer, variable rate home loans may help you streamline your everyday finances, with features like offset accounts that can combine everyday banking with your home loan, redraw facilities, and packaged credit cards.
• Potential for lower repayments: The interest rate you pay on a variable rate loan can go up or down depending on your lender’s decisions and those of the RBA, and if your interest rate goes down, that means you could end up paying less money each month on your home loan.
• Potential for additional repayments: Generally speaking, you will be free to make additional home loan repayments with a variable rate loan. This could help you to potentially reduce the balance of your loan, lower the interest you pay, and even pay off an investment property more quickly.

What are the possible disadvantages of a variable rate investor home loan?

If you are considering a variable rate home loan for your investment property, potential disadvantages to be wary of include the potential for interest rates to go up and the lack of certainty that comes along with that, as well as the potential for higher fees. In more detail, these disadvantages are:

• Potential for rates to rise: The interest rate you pay on a variable loan will be set by your lender, and if they decide to raise their rate, your payments will also increase. Even if your rates were low when you signed up, they could get higher and stay that way for a prolonged period, which may be a potential disadvantage.
• Uncertainty: The potential for rate rises also brings with it uncertainty. You will not necessarily know when or by how much your lender will raise their interest rate if they are planning too. This, in turn, can make it challenging to set your own budget, due to not knowing exactly what your mortgage payments may be each month.
• Higher fees: While variable rate home loans can come with an array of features, this can make them more expensive than fixed rate home loans, which are typically more no-frills. Depending on your needs, though, you may find that the convenience of features like offset accounts could alleviate some of your concerns.

What happens if you lie on your investor home loan application?

When borrowing money to purchase an investment property, it is important to be upfront about the purpose of the loan on your application, as lying on a home loan application can have serious consequences. As mentioned above, home loans for investors tend to come with higher interest rates and a lower loan-to-value ratio (LVR) than home loans for owner occupiers, because lenders often see them as more risky. It is important to clearly state the purpose of the loan for which you are applying.

If you tell your lender that you plan to live in a property as an owner occupier, but they find out that you plan to rent it out, they are likely to reject the application, and you may also receive a black mark on your credit score. If other lenders check your credit history and find that you have lied on an earlier application, they may well be unwilling to loan you money, which means it could become significantly harder for you to be approved for a home loan in future.

It is also important to know that lenders have the right to recall home loans if they find out you gave false or misleading information on your initial application. This means that if you successfully apply for an owner-occupier loan and your lender finds out you are using the property as an investment, they may demand that you pay off the balance of the loan within 30 days. If you are unable to, the end result may be a forced sale of your property to pay off the balance owing on your mortgage.

How do you compare variable rate investor home loans?

If you’re in the market for an investment property and wondering about the available variable rate investor home loans on the market, you can start your search by comparing home loans with Canstar. Each year, Canstar gives out Home Loan Awards to the lenders that offer outstanding value to Aussie home buyers. The winning providers in the Investment Variable Home Lender category may also be able to offer you an investor home loan at a competitive rate.

Consider the Target Market Determination (TMD) before making a purchase decision. Contact the product issuer directly for a copy of the TMD.

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